Mathias Terheggen

Let’s start with the obvious. If it is called social investment then it should be that – an investment. Well, yes, social investments are no doubt investments in their execution but actually they are much more philanthropy than the term suggests. In fact, if one believes the verdict of the approximately 150 participants at a recent panel discussion on the topic ‘Is social investment philanthropy or investment? Does it matter?’, organized as part of the Philanthropy Programme, a joint education initiative between STEP and Philanthropy Impact, and hosted by Bircham Dyson Bell (BDB) at their London offices on 11 September, social investments are first of all philanthropy.

So if the answer is so non-intuitive, what about the second question posed: is it worth discussing the nature of social investments to start with? Here the answer was quite clear – both from the audience and from the panelists. Yes it is! Especially if you set up the discussion as well as the organizers of this panel did. The event consisted of two teams of three openly arguing against each other under the moderation of Jonathan Brinsden from BDB. Martin Rich, Suzanne Biegel and Gavin Francis argued that social investments are exactly that while John Kingston, Edward Finch and I defended the ‘antithesis’. It is in juxtaposing the two positions instead of convening exclusively advocates of one or the other school of thought that the full complexity and a much more nuanced picture emerges. So now that the value of the question has been established, why is it so difficult to answer?

At the origin are two fundamental misperceptions about philanthropy. The first one is that philanthropy is limited to activities that are loss making and intrinsically financially non-self-sustaining. This misconception may stem from confusing philanthropy with altruism.

The second misconception is an assumption of a lack of rigour in decision making and execution within philanthropy. It may be rooted in both real and perceived historic failure and inefficiency of social sector work, eg international aid.

So if philanthropy may well embrace activities that are financially self-sustaining if not profitable, and if philanthropists may be equally professional and tough when it comes to converting their funds into profitable and impactful investments – albeit with a more long-term and comprehensive perspective on creating social and financial value – what would the answer to the initial question then look like?

On the point of social investments being investments, it remains a fact that once made social investments are to be treated like regular investments. They require investor skills and capacity. And their success depends, irrespective of their social nature, primarily on the ability to put money into an asset such that it fulfils an expectation of capital appreciation, dividends or interest earnings. The latter of course should balance with the risks involved.

It is also true that, looking into the future, the hope of scale through attracting new, predominantly non-philanthropic funds to social investments, ie pension funds, will see investors enter that may be open to social considerations but first of all are guided in their investment decision by their financial yield requirements. As such they consider social investments primarily as financial opportunities.

This argument already demonstrates an additional challenge in the discussion – that of arguing in principle versus within the boundary conditions of the current social investment landscape. Because as much as the future may see purely financially incentivized investors within the social investment landscape, today’s social investors all enter as philanthropists.

Which brings us to the indicators for social investment rather being philanthropy in nature and origin.

Looking at the current state of affairs, the social investment sector is characterized by a lack of standards and infrastructure, which in turn leads to inefficiency and high transaction costs. It is with that in mind that taking a rather philanthropic attitude to social investments – that is a long-term perspective and modest financial expectations – helps to match expectations with current investment performance instead of risking an experience of excitement being followed by frustration – and exit from the investment.

More intrinsic to social investments is the need for an appreciation of measuring performance beyond the financial dimension in order to enable smart investment decisions. And no one over the last years has learned to appreciate the merits as well as the shortcomings of measuring social and environmental impact more than philanthropists – and for that matter made a bigger contribution to the challenge.

And finally, in order to be successful on all three bottom-lines and scalable, social investments cannot be social by coincidence but require – as John Kingston put it – their social intent to be built into their ‘DNA’. In that context all discussants shared their concerns about an increasing tendency to (re)label existing investments as social to increase their appeal to new investor segments.

So if the debate proved one point, it is that the answer to the question whether social investments are pure investments or need to be seen through a philanthropist’s eyes is not a clear-cut one. And in the future the answer may well be ‘both’, with different kinds of social investments coexisting and appealing to different kind of investors. But for now social investments are philanthropy.

Dr Mathias Terheggen is an international expert on philanthropy and social finance. He has held positions with McKinsey & Co and UBS and serves on several non-profit boards as well as actively investing in social start-ups.